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International D&O

Your global D&O coverage may not be as global as you thought

By Dennis H. Pillsbury

It’s two o’clock in the morning when the phone rings. Once you awaken from the deep REM sleep you managed to reach for the first time in nearly a week, you utter a few unprintable words, compose yourself, and answer the phone.

It’s TJ, the president of one of your most important commercial accounts and he’s not happy. “Kathy’s been arrested. She was meeting with the management team at our subsidiary in ———- and the police came in. She’s in jail and she’s upset. We’ve got to get her out of there now.” The president continues on, describing Kathy’s call to him, which was brief since the police took away her cell phone almost immediately after she reported she was heading to jail. Later reports came from employees at the subsidiary.

You’re half listening and half trying to wake up, which leaves very little left for actual thinking. Finally, you remember Katherine P. ————- is the CFO of the firm and she never seems to be happy under the best of circumstances. That’s the bad news. The good news is your brain is starting to function and you know you have D&O coverage for the company that provides international coverage anywhere in the world.

The president is still talking and you realize you need to utter more than the obligatory grunts you’ve been offering up to this point. “This is just like any other emergency,” you tell yourself. “You’ve been through fires, auto wrecks; you just need to stay calm and calm down everyone else around you.”

TJ pauses for a breath and you take the opportunity. “Look, TJ,” you say. “Our D&O company has 24-hour service. I’ll call them as soon as we hang up and let them know what happened. At best, we’ll bail out Katherine (you never could call her Kathy) right away and start planning her defense. At worst, she may have to spend a night in jail, but we’ll get her out soon.”

And you really believe that. And so does TJ. He hangs up with a quick, “Get to it then,” trusting you to take care of the matter just as you did when there was a suit from a disgruntled employee that went away quickly, thanks to the insurance company’s attorney.

Unfortunately, the nightmare is just beginning.

Katherine will spend a lot more than one night in jail. Your relationship with TJ, a friend since high school, will be strained, to say the least. Your relationship with your E&O carrier also will be strained. And your relationship with the D&O carrier that forgot to mention that international coverage applied “to the extent possible” will also be strained. Somebody forgot to mention that many countries around the globe require companies to have local coverage for their D&O, written in the official language of the country, and that outside funds will not be allowed into the country to be used for bail, attorney fees, etc.

This was one of the more horrifying scenarios that could occur, according to the session on D&O Globalization at the annual meeting of the Professional Liability Underwriting Society (PLUS) held in Chicago last November. The speakers agreed that, while the subject was complicated, the answer to most problems could be expressed quite simply: Know the local laws in the country or countries in which you operate.

We spoke to one of the speakers, Richard J. Bortnick, attorney with Cozen O’Connor, Philadelphia, about some of the potential pitfalls that could face company officers who are venturing to company units overseas.

“I think that one of the key points to remember is that while the laws or regulations requiring local coverage may seem parochial, the legal climate in many of these countries can be quite sophisticated. Many countries are adopting U.S. style class action suits. Securities litigation has migrated to other countries. In China, for example, more than 2,000 lawsuits were filed last year. This means that it is imperative that officers and directors be adequately covered in every country in which their company does business.

“In many countries, your insurance company may have to domesticate some of the forms to be compliant with the laws and regulations of the country,” Rick continues. “In other countries, you will have to buy policies from local insurance companies which, in most cases, will be reinsured with a foreign reinsurer. This can be a good thing since the local company often will use the foreign reinsurer’s form for coverage. Oftentimes, you can have your own D&O carrier act as the fronting company for the coverage and provide the reinsurance backup. You also have to check the laws to determine how much of the coverage can be reinsured. Some countries will not allow 100% of the coverage to be reinsured.

“In addition,” Rick adds, “most countries require that the insurance contract be written in the local language. This too can create problems if a covered claim winds up in litigation, as there have been cases where the local language policy and the original English language policy were brought into court and the most liberal interpretation is used to determine the amount of coverage.”

Directors and officers also need to be cognizant of the employment laws in the countries in which they operate in order to avoid potential lawsuits, Rick warns. “Termination of an employee must comply with the law of every country in which the person worked. You also need to be extremely careful to protect the privacy of employees and customers. The privacy rules in the European Community, for example, are stronger than ours.”

Another unpleasant surprise for some directors and officers occurs in some countries where “D&O coverage is considered a benefit and, therefore, the premiums paid for coverage would be taxable income for the director or officer.”

Rick concludes: “The globalization of the economy is a fact. France and China are the fastest growing countries in terms of new public company listings. More companies are finding refuge outside the United States for a variety of economic reasons.”

As this trend continues, and it will, Pandora’s Box is open, and agents have to become familiar with the D&O and other insurance requirements of the countries in which their clients operate. To fail to do so could invite E&O claims and loss of business to competitors who have taken up this challenge. *

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